When the effective interest method of amortization is used for a bond premium,the amount of interest expense for an interest period is calculated by multiplying the
A)carrying value of the bonds at the beginning of the period by the face interest rate.
B)face value of the bonds at the beginning of the period by the effective interest rate.
C)carrying value of the bonds at the beginning of the period by the effective interest rate.
D)face value of the bonds at the beginning of the period by the face interest rate.

Question

Quizplus · Accepted Answer

When using the effective interest method of amortization for a bond premium, the amount of interest expense for an interest period is calculated by multiplying the carrying value of the bonds at the beginning of the period by the effective interest rate. This is because the effective interest rate method recognizes interest expense based on the actual market rate of interest, which is used to discount the future cash flows of the bond. As a result, the interest expense will vary from period to period, as the carrying value of the bonds changes over time due to the amortization of the premium.

When the Effective Interest Method of Amortization Is Used for a Bond